Bloated with Heavy Debt

By John Greenwald

To corporations, it is the mountain of debt that has been created by a spate of fierce merger wars. Consumers who have been seduced by easy credit know it as the flood of bills that arrive each month. For the Government, it is the largest and most menacing budget deficits in U.S. history. From whatever vantage point it is viewed, Americans have been on a frantic borrowing binge. And that vast accumulation of IOUs has become a frightening threat to economic well-being.

The numbers alone tell an awesome story. U.S. debt for all households, governments and nonfinancial businesses swelled last year by $722 billion, or 14%, marking the largest increase ever. Led by the runaway buildup of federal borrowings, every sector of the economy contributed to the record gain. Business added the heaviest load of new obligations in more than a decade. Consumer debt took the greatest leap in five years. Warns Federal Reserve Chairman Paul Volcker: "Debt growth of this magnitude would appear to be much faster than is consistent with the long-run health of our economy and financial system."

This spring the U.S. became a debtor nation for the first time since 1917. Raymond Dalio, a Connecticut-based economic consultant, estimates that the country's net foreign debt could grow to $1 trillion by 1990. At home, consumers remain hefty borrowers. Installment loans, which account for 22% of household borrowing, jumped 21.3% during the twelve months that ended last April, the largest gain since the 1950s.

The big debt buildup holds many dangers. Heavy borrowing is an addiction that can require debtors to take out more and more loans simply to stay even. Eventually, of course, all the IOUs come due. Before then, a sharp drop in incomes or corporate profits could leave many individuals and firms without sufficient means of repayment. They would then have to switch to painful frugality and perhaps be forced into bankruptcy. "Debt in many cases facilitates economic activity," says a Federal Reserve economist. "Like alcohol, it stimulates to a certain point. Then it becomes burdensome. It is not clear at what point stimulation turns to drag, but many people seem to think we've reached that point."

Millions of individuals certainly have. Tempted by easy credit and a cornucopia of everything from cars to compact disks, consumers across the U.S. are becoming overextended. The Mortgage Bankers Association said last month that mortgage delinquencies reached 6.19% in the first quarter of 1985, the highest level since that group began keeping records in 1953. A separate report by the American Bankers Association showed additional signs of strain. The organization, which represents 13,000 large and small lenders, said 2.4% of all consumer installment loans were delinquent at the end of the first quarter. That represented a two-year high.

A growing number of harried borrowers are showing up regularly at credit counselors' doors. "We've got more business than we can respond to," says Andrew McGehee, executive director of the Consumer Credit Counseling Service of South Florida. "Obviously, the problem is getting worse." McGehee's nonprofit service advised 2,244 families last year, up 17% from 1983. He expects to surpass that this year. The National Foundation for Consumer Credit, which operates 245 offices around the U.S., said consumers are now arriving for advice in greater numbers than at any time in the past five years.

Not all overtaxed individuals turn to professional help. Erica Chambre, 34, the personnel director for an oil and gas company in Oakland, extricated herself from a morass of debt by disciplined effort. When her borrowings reached $40,000 on top of a $65,000 mortgage, Chambre, who was earning $35,000 a year, decided that it was time to stop. "For four months I could hardly sleep," she recalled, "worrying about the trouble I was in." Her solution was to repay the loans by working seven-day weeks for more than two years and curtailing expenses. Gone now are the twice-yearly European vacations, the expensive athletic club membership and the shopping binges in designer boutiques. Gone also is her nonmortgage debt. Says Chambre: "I'm so glad that chapter of my life is over."

Many experts blame affluent individuals like Chambre for much of the borrowing spree. "The coming of age of the baby boomers," says Henry Kaufman, chief economist for Wall Street's Salomon Brothers, "is altering the relationship between consumer credit and income, reflecting this group's greater acceptance of credit." Terry Blaney, president of Houston's Consumer Credit Counseling Service, is blunt: "We have a whole generation of people who have been raised with high expectations. Couple that with all the advertising we see, and you've got a lot of materialistic people. There has to be an adjustment in attitude about credit."

Borrowing has become so easy, however, that it can take great willpower to resist. Perhaps the biggest lures are the credit cards that companies are so eager to hand out. "We've got this frenzy of gold MasterCard and gold Visa card offers in the mail during the past two months," says Cynthia Barnes, 28, a computer engineer at AT&T Bell Laboratories in suburban Chicago. "We got three of them in one day last week." The proliferation of plastic astonishes even bankers. Says John Godfrey, senior vice president and chief economist of Jacksonville-based Barnett Banks of Florida: "I'm amazed at the number of mailings I receive at home." He promptly throws them out.

Lenders are dangling far more than credit cards before consumers. Many banks now provide individuals with substantial lines of credit, a service once offered almost exclusively to corporations. Norwest Bank Minneapolis grants lines that typically total about $25,000 and can exceed $100,000. Norwest also offers lending programs for cars and boats that can cut monthly payments nearly in half. The loans run for several years and then come due in a lump sum. Automakers too are extending easier terms. Ford Motor Credit estimates that 45% of its 1985 lending has been for 60 months, rather than the 36-month period that was previously typical.

A batch of sophisticated new financial instruments have given an added boost to the borrowing binge. They are based on a method popularized in the 1970s by organizations like the Government National Mortgage Association. That federal agency buys mortgages from lenders and then sells bonds and other securities that are backed by the debt. Now private lenders are snapping up everything from car loans to equipment leases and offering shares in them to investors. Anthony Dub, a managing director of the First Boston investment banking firm, plans to begin selling bank credit-card loans later this year. Known in Wall Street jargon as securitization, the rapidly spreading technique ensures that ! the original loanmakers have plenty of cash available to continue lending.

Corporations too have been dashing into debt. "Most of the borrowing increase by corporations has been the result of takeover mania," says William Cornish, executive vice president of Chicago's Duff & Phelps, a securities research firm. "Either companies want to add to their holdings or they fear that someone wants to take them over." In evading Raiders Carl Icahn and T. Boone Pickens, Phillips Petroleum took on $4.5 billion in new loans. It now plans to sell about $2 billion worth of assets in the next twelve months to trim its obligations. Chevron borrowed $10 billion to acquire Gulf Oil last year, and it too has been forced to cut back. The California giant is negotiating the sale of a majority stake in Gulf's Canadian operations for $2.5 billion, and may unload more property by the end of the year. The proceeds from all such transactions will go to pay off debt.

Like individuals, companies borrow to keep up with the Joneses. The debt that it takes to remain competitive can grow particularly heavy when corporate profits are low, as they have been for the past year. Even Pan American World Airways, which sold its Pacific routes to United in April for $750 million, will soon have to borrow more to acquire a new fleet of fuel-efficient jetliners. The company expects to assume more than $1 billion in obligations when it starts taking delivery of 28 European-built Airbuses in 1987.

Federal Reserve Chairman Volcker voiced new concern about corporate debt last month during congressional testimony concerning the Reagan Administration's tax program. He criticized part of the plan because it allowed interest payments to remain deductible. That, said Volcker, encourages companies to borrow instead of selling stock to raise funds.

But the debt that worries economists most is the federal budget deficit. It threatens to grow at the staggering annual rate of $200 billion for the rest of the decade. Attempts to slow down the borrowing, like the currently deadlocked budget negotiations in Congress, seem futile. The deficit, warns Manuel Johnson, assistant treasury secretary for economic policy, "is a symptom that Government is spending beyond its means. Ultimately, if it continues to do that, it will force the private sector to finance that spending by having to pay higher taxes or having to tolerate higher inflation or higher interest rates." The Constitution calls on the Federal Government % to provide for the general welfare of Americans. A good step now would be for the biggest borrower of all to set a better example.

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With reporting by Gisela Bolte/Washington and Frederick Ungeheuer/New York